Looking for further information?

We use cookies to provide a user-friendly experience. By continuing to browse this site, you give consent for cookies to be used. To find out more how to set your own preferences please read our Cookie Policy.

By continuing to browse this site, you give consent for cookies to be used. To find out more please read our Cookie Policy.

IMPORTANT INFORMATION

Please read this Important Information. If you do not agree to the below, please do not accept and enter this site.

The information on this site is aimed at institutional investors in the Netherlands and is not intended for use by any other type of investor.

Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and investors may get back less than the amount originally invested. Fluctuations in exchange rates may affect the value of an investment and any income derived from it.

Nothing contained within this site should be construed as investment advice by Merian Global or of any other regulated activity. This site is not a substitute for independent professional advice and users of this site should obtain appropriate professional advice relevant to their particular circumstances prior to making any investment decisions. The site must not be relied upon in connection with any investment decision. The products on this site may not be suitable for all investors.

The information on this site is not directed at any US Person. By proceeding, you confirm that you are not a US Person. This site is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

REQUEST INFORMATION

STAY IN TOUCHWITH OUR INSIGHTS

Global equities

Every cloud…

Investors should look beyond the bull-bear tug of war that’s dominating US equity headlines and focus on the economy’s long-term attractions

53 viewed

Investors should look beyond the bull-bear tug of war that’s dominating US equity headlines and focus on the economy’s long-term attractions

It seems the jury is still out over the future direction of the US equity market. Not even a month ago the S&P 500 index flirted with all time-highs, prompting the bulls to wonder if investors really could be the beneficiaries of a seventh successive year of share price gains. Up until then the bears appeared to have had the upper hand – cue recent downward revisions to Q1 GDP numbers, softer than expected retail sales in April and the havoc wrought on company results from a stronger dollar.

I’d counter this pessimistic sentiment. While exporters were hit in the Q1 results season (and yes 45% of S&P companies are overseas earners) domestic companies fared relatively well. Regarding softening GDP numbers, we bulls prefer not to talk about output but national aggregate income which, for the first quarter, registered 1.4% annualised growth[1]. Economists still think there’s no reason for the US not to register 2.5%-3.0% growth in the second quarter annualised.

For me it seems as though we are still in the sweet spot of equity investing. The risk of the US Federal Reserve tightening has been kicked a little bit further into the long grass and, if the IMF has its way, is likely to stay there for some time to come. Yet raising rates is a sign that the economy is not only off life-support but recovering well in the process.

So let’s focus on what we know so far. Knock-out non-farm payroll numbers for May aside, if ever there was a sign of confidence returning to the US economy it’s in the escalating value of M&A deals. In May alone these totalled a staggering US$ 243bn[2], which if this rate continues could well top 2007’s record. If management didn’t believe the economy was stable they wouldn’t be committing such large amounts of cash to buying other businesses, surely?

And corporates are right to be optimistic. The US economy is one of just three to experience self-sustaining growth in 2014 – the other two being India and the UK. Corporate margins are nearing 50 year highs and, unlike many, I see no reason for them to revert to the mean given the double tailwinds of a fall in oil prices and advances in technology. So while optimistic on the economy, my only real concern is that the rate of corporate investment spend needs to increase. Companies are still in the ‘let’s return cash to shareholders’ mind-set, rather than ‘let’s invest in plant and machinery mentality.’

Unsurprisingly, given the concerted actions of central bankers to drive down bond yields and whip up demand for equities, risk appetite has increased substantially from its October 2014 lows, with investors favouring growth stocks over value. Although, as most US equity investors will know from bitter experience the rotation from growth to value styles and back to growth could change anytime soon.

The recent correction in global bond markets suggests that point may not be too far away. While style volatility has been less pronounced in the US than Europe that’s not to say it doesn’t exist. Watch this space. The trick is, as ever, to keep alpha returns diversified.